Food Inflation Trajectory And Base Effect To Shape Inflation Outlook

The Reserve Bank of India (RBI) has retained its inflation projection for the fiscal at 4.5 per cent. The outlook for inflation will largely be shaped by food inflation trajectory and base effect. Further, the recent uptick in metal and crude oil prices due to ongoing geopolitical tensions may pose upside risks to inflation and need close monitoring. The central bank retained its real GDP growth projection for FY25 at 7.2 per cent with risks evenly balanced. The agriculture sector is expected to perform well on the back of above normal rainfall and robust reservoir levels. The RBI projections indicate that economic growth is robust and may remain above seven per cent for next couple of quarters. Additionally, credit deposit differential has now narrowed down to 150 basis points, the lowest since May 2022 and down from a high of 810 basis points in December 2022. Interestingly, the year-to-date growth rate in the current fiscal shows that credit growth after adjusting for the merger is still lower by Rs. Three trillion as on September 20, but more interestingly higher by Rs. 3.4 trillion compared to deposit. The other regulator/developmental announcements mirror the RBI’s penchant to reinforce the B&FS structural architecture.

First, there are 1502 UCBs. Of this, 79 UCBs have capital adequacy less than nine per cent. The proposal to explore alternate avenues to raise capital for UCBs is to address this inherent contradiction in UCB. The proposal is chain of long drawn reform process in the segment and will increase the stability of the sector and protect depositor interest. Secondly, smoothening data asymmetry for tackling climate related funding through proposed 2-stage RB-CRIS platform, enhancement of UPI Lite wallet limit to Rs. 5,000, introducing name look-up facility in inter-bank transfers to mitigate customers’ woes and reduce frauds all going a long way in cementing the cogs that make the banking forward looking yet connected to the grounds. Thirdly, a ‘compliance first’ culture, a strong risk management framework and strict adherence to fair practices code coupled with sincere approach to customer grievances is the clear prescription from the regulator to the NBFCs.

The fine balancing act of the central bank, a clear audacity defying odds and orbit of other big boys club members to take an independent and appropriate rate cut call shows its manoeuvrability to ensure inflation remains aligned to a narrow target framework, duly factoring in the vulnerability of base effects and supply shocks. The fine balancing act, assiduously choosing the Middle Path, gives a raw finesse to the Mint Street actions. One can only expect the calibrated bringing back of inflation horse to stable is symbolic of age-old Indian practice with coming home of the horse reinforcing the sovereign’s reigning supremacy. The Reserve Bank of India has reiterated that policy must continue to be actively disinflationary to ensure fuller transmission, as the last mile of disinflation is still tricky. The policy tone, as per Emkay, was confident on domestic dynamics with no change in FY25 growth.